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Sluggish wage growth leads to drop in consumer confidence

A cashier hands a customer his change and

A cashier hands a customer his change and receipt during a transaction at a Sears store, in Henderson, Nev., on Nov. 23, 2012. Consumer confidence unexpectedly declined in July 2014 to a four-month low as Americans grew increasingly frustrated with the slow pace of wage gains. Credit: AP

Consumer confidence unexpectedly declined in July to a four-month low as Americans grew increasingly frustrated with the slow pace of wage gains.

The Thomson Reuters/University of Michigan preliminary index of sentiment dropped to 81.3 this month from 82.5 in June, according to data issued Friday. Other reports showed the world’s largest economy would probably strengthen in the second half of the year and payroll gains last month were broad-based.

Just over half, 51 percent, of households surveyed this month said their earnings would probably not keep up with inflation over the next year, underscoring Federal Reserve Chair Janet Yellen’s concern that pay isn’t growing fast enough to sustain the recovery. Nonetheless, more Americans said they were thinking about buying a house, car or durable good, a sign spending will be sustained, according to Gennadiy Goldberg.

“Consumers are having a little bit of trouble seeing further improvement later down the road,” said Goldberg, a U.S. strategist at TD Securities USA LLC in New York, who has access to the data. “If you started to have wages pick up, you would probably have more improvement in buying expectations.”

Stocks rose, after the Standard & Poor’s 500 index’s biggest drop since April, as Google Inc. advanced and concerns eased over crises in the Ukraine and Middle East. The S&P 500 climbed 0.8 percent to 1,973.14 at 1:08 p.m. in Manhattan.

Survey Results
The median projection in a Bloomberg survey of 68 economists forecast the sentiment index would climb to 83 this month. Estimates ranged from 80 to 85.2. The index averaged 89 in the five years before December 2007, at the beginning of the last economic slump, and 64.2 during the recession.

Another report showed the index of leading economic indicators climbed 0.3 percent in June after a 0.7 percent May increase that was stronger than initially estimated, according to data from The Conference Board, a New York-based research group. Six of the 10 indicators in the measure of the outlook for the next three to six months contributed to the increase.

“The pace of economic activity continued to expand moderately,” Ken Goldstein, an economist at The Conference Board, said in a statement. A pickup in consumer demand resulting from the pickup in hiring remains a source of strength for the economy, he said.

The University of Michigan’s survey showed consumer spending was likely to keep growing. Home-buying intentions climbed this month to the highest level of the year, indicating that the recent decline in mortgage rates may be helping to stoke demand, according to TD Securities’ Goldberg. Plans to buy autos and long-lasting goods also improved, he said.

Auto Sales
Recent figures show households are sustaining spending. Cars and light trucks sold at a 16.9 million annual pace in June, the strongest since July 2006, according to Ward’s Automotive Group. Deliveries at General Motors Co. and Ford Motor Co., the two largest U.S. automakers, exceeded analysts’ estimates.

A Commerce Department report this week showed retail sales climbed 0.2 percent in June as department stores, clothing outlets and Internet retailers led a broad-based advance.

The Michigan sentiment survey’s measure of expectations six months from now decreased to a four-month low of 71.1 from 73.5 the prior month. The current conditions index, which measures Americans’ assessment of their personal finances, rose to 97.1 this month from 96.6 in June.

Comfort Index
Today’s figures corroborate the Bloomberg Consumer Comfort Index. The monthly gauge on consumer expectations of the economy dropped to 46 in July from 48.5 the prior period, which was the highest in a year. The weekly index of confidence held near a 2014 peak, figures showed Thursday. The measure of the state of the buying climate climbed to its second-highest reading in more than six years.

Part of the diminished outlook in Michigan’s preliminary July reading centered on wages. Households projected earnings would climb 0.5 percent over the next 12 months, the lowest since January, according to a research note from economists at Credit Suisse in New York.

At the same time, Americans expected an inflation rate of 3.3 percent over the next year, up from 3.1 percent in June.

“The people who have jobs are feeling more secure that they can keep their jobs,” said Dana Saporta, director of U.S. economics research at Credit Suisse. “When we go the next step, and talk about wage growth, that’s something that is still missing.” That means that “we should continue seeing growth in spending but maybe not robust growth,” she said.

Yellen’s View
Yellen referred to the “slow pace of growth” in measures of hourly compensation in remarks to the Senate this week as a sign of “significant slack” in labor markets.

Recent data showed the job market is improving. Payrolls rose by 288,000 workers in June, according to Labor Department data. Employment is on pace for the biggest annual gain since 1999. The jobless rate declined last month to an almost six-year low of 6.1 percent.

Another report Friday showed the gains were broad-based throughout the country. Payrolls rose in 33 states in June and the unemployment rate fell in 22, according to a Labor Department breakdown. Florida led the nation with a 37,400 increase in payrolls, followed by California with 24,200 more jobs. South Carolina posted the biggest 12-month decline in the jobless rate — falling to 5.3 percent from 7.8 percent.

“We can’t keep getting numbers like these and not admit that the labor market has healed,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “States with higher unemployment are seeing steep declines. Big-number declines equal big progress on putting America back to work.”

Hourly Earnings
Even with the pickup in hiring, worker pay increases have been more subdued. Hourly earnings for production workers have increased 2.1 percent year-over-year on average since the recession ended in June 2009, compared with 3.1 percent in the previous expansion.

Faster income growth would help ease the burden of higher prices. The cost of living, as measured by the consumer price index, rose 2.1 percent in May from the same month last year, the biggest increase since October 2012. Food costs in May climbed 0.5 percent from the prior month, the most since August 2011.

“It’s still pretty tough out there,” Howard Levine, chairman and chief executive at Family Dollar Stores Inc., a Matthews, North Carolina-based chain of budget stores, said on a July 10 earnings call. “The low-end consumer has not benefited in this recovery at all. The government cutbacks continue. There’s quite a bit of health care uncertainty. Coming from this unbelievably cold winter, heating prices, heating oil and gas prices are moving upwards. So, it’s a tough playing field out there.”

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